10 pieces of advice for new investors
You can take risks, but don’t be foolish
Newsflash for investing newbies: You don’t need a Ph.D. in finance to start saving for retirement or other long-term goals.
But you can’t rely on beginner’s luck either. You need to learn and implement some basic investing concepts. Keep it simple. Even acing Investing 101 strategies will help you achieve goals like saving for a home, boosting your 401(k) balance so you can retire in style, or becoming a millionaire.
Here are 10 investing tips that financial advisers say can help beginner investors build wealth over the long haul.
Tip 1: Start early
When it comes to investing, time is your friend.
“When should you start investing? The answer is as soon as possible,” says Blair duQuesnay, investment adviser at Ritholtz Wealth Management in New Orleans.
The more time your money is invested, the more time it has to grow. The beauty of investing is you earn interest on the interest you’ve already earned on your initial investment – a concept known as “compound interest.”
Legendary scientist Albert Einstein reportedly once said that compound interest is “the eighth wonder of the world” and “the most powerful force in the universe.”
Tip 2: Go for growth
There’s a big difference between saving and investing. Investing is about taking some risk to reap higher potential returns.
Large U.S. stocks, for example, generated compound annual returns of 10% in the 93 years ending in 2018, according to Morningstar. In contrast, a 20-year government bond returned 5.5% per year and 30day Treasury bills gained 3.3 per annum.
Tip 3: Focus on your 401(k)
If you just landed a job and your employer offers a 401(k) retirement plan, make sure you enroll. It’s an easy way to regularly sock away money that you’ll need when you stop working decades from now.
One benefit of a 401(k) is you’ll automatically have a portion of each paycheck go directly into your retirement savings plan, which offers a menu of diversified investment options to choose from. Since contributions in a traditional 401(k) are made with pre-tax dollars, you’ll also lower your tax bill. Another plus is most employers also contribute to your 401(k) via matching contributions.
Tip 4: Keep it simple
No clue how to pick the right stocks or mutual funds? Or how to build a diversified portfolio? Don’t worry about it.
Most 401(k) plans offer “target-date” funds. These funds do all the work for you. They pick the individual investments like stocks and bonds, as well as make sure your holdings are diversified and not too risky for your age.
Tip 5: Put your savings on autopilot
What you don’t want to do is put off saving until tomorrow. To avoid procrastination, set your long-term investments on autopilot, advises Scott Pedvis, a financial adviser with Wells Fargo Advisors in New York City.
“Automate your investments,” Pedvis says. If you aren’t already saving automatically in your 401(k) via payroll deductions at work, set up a system where money is taken out of your checking account and moved into your investment account on a predetermined date each month.
Tip 6: Don’t put all your eggs in one basket
Think Tesla will dominate the electric car space forever? Well, even if you do, don’t invest every penny of your money in Elon Musk’s company.
Why? If you’re wrong and Tesla’s stock tanks, you won’t have anything else in your portfolio to cushion the financial fall. The concept of owning a wide variety of investments is known as diversification. Your much better off investing in funds that own many stocks in different businesses or a variety of interest-paying bonds to spread your risk around.
Tip 7: Figure out your ‘pain’ threshold
Try to determine your maximum pain threshold, or how big a loss you can endure without bailing out of the market at the wrong time.
“The biggest mistake beginners make is forgetting that it is a long-term investment,” says Dominque Broadway, founder of Finances De-mys-ti-fied.
Tip 8: Try to save at least 10% of your income
“A good rule of thumb is to try to save 10% to 15% of your pay in your retirement plan,” duQuesnay says. (Include any company match in calculating your savings rate.)
If you can’t save that much at the start, gradually increase your savings annually, she advises.
Tip 9: Don’t listen to pundits
Turn off the financial news. Bears warning of a market meltdown might spook you out of the market at the wrong time. And bulls predicting that the market will double might make you overly optimistic and vulnerable to a big selloff if you go all in.
Tip 10: Seek help if you need it
And if you don’t feel comfortable getting started on your own, ask for help, Pedvis adds.
“A lot of investing can be done independently, but not everything in your life can be do-it-yourself,” Pedvis says.